Should You Buy Hexo Stock After Zenabis Deal? This Analyst Says ‘No’
There’s further consolidation in the Canadian cannabis industry. Following the recent announcement of a merger between Aphria and Tilray, the next tie-up is between Hexo (HEXO) and Zenabis Global.
Hexo is acquiring the fellow Canadian weed producer for C$235 million in an all-stock deal.
Going by Zenabis’ 20-day VWAP (volume weighted average price), the purchase suggests a 19% premium for Zenabis shareholders. The transaction is expected to close in 2Q21.
HEXO said that within one year, the combined entity could start yielding annual synergies of $20 million, while by sales, the company will become a top three player in Canada’s recreational cannabis market. At the same time, the deal will allow Hexo to gain a foothold in the European medical cannabis market; Zenabis has a partner based in Malta, which supplies pharmaceutical products to the European market.
Furthermore, Hexo will more than double its cultivation space, with the addition of Zenabis’ 2.7 million square feet of cannabis growing facilities.
Jefferies analyst Owen Bennett, however, is not entirely convinced.
“While the near-term financial benefits of this deal are significant, we wonder whether these have clouded judgement around longer strategic benefits and value creation,” the analyst said.
For one, Bennett believes that where the Canadian market is concerned, Hexo is “not really acquiring any brands of value,” given Zenabis’ most successful brand is “in value.” On top of questioning value brands’ “long-term sustainability,” Bennett also thinks the European aspect is being overplayed. The European market is increasingly competitive, with other players better positioned, in what in any case is a market far off reaching maturity.
Bennett thinks the real opportunity lies elsewhere.
“We think Hexo would have been much better placed looking to do something in the US,” the analyst summed up. “After all, it is US optionality which will be critical to maintaining current Canadian sector multiples, not Canada and Europe.”
Based on the above, Bennett sides with the bears. The analyst rates HEXO an Underperform (i.e. Sell), and his C$2.78 ($2.19) price target suggests a sharp 74% downside from current levels. (To watch Bennett’s track record, click here)
Overall, analyst are not ready to take the gamble on this ‘show me’ story. HEXO's Hold consensus rating is based on 5 Holds and 1 Buy and Sell, each. At C$8.00 ($6.29), the average price target suggests downside of ~26% over the next 12 months. (See Hexo stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
